Saturday, 19 March 2011

China´s unsustainable boom

South China Mall - 99% empty

Vikram Mansharamani, equity investor and Yale lecturer, is convinced that there is a big bubble waiting to burst in China:

"China is exhibiting all the signs you would expect from an unsustainable boom." He first points to the housing market, where investment hit the inauspicious market of 6% of GDP -- the same mark the U.S. hit in 2006 as the bubble was bursting. What's more, outstanding loans for developers and residential mortgages in China have increased by a factor of FIVE in the last decade. Loan balances have nearly doubled in the last three years alone.

Even worse, Mansharamani says, the Chinese government has spent lavishly to create demand that never materialized. He points to ghost towns like Qungbashi, in Inner Mongolia, a city designed for 1.5 million residents, but drew only 20,000 -- hardly one percent. He points to the New South China Mall, not far from Guangzhou, which was built to handle 1,500 tenants. Instead, it houses a few dozen -- hardly one percent. This sort of one-percent success rate creates ludicrous overcapacity that is eerily reminiscent of the empty homes and strip malls lining recession ghost exurbs in Arizona and Nevada. Mansharamani sees it as the prelude to a dramatic slowdown in government spending on buildings and infrastructure.
---If China slows down even to 5% growth a year, that will take a booming commodities market down with it.

THE NEXT FEW MONTHS

In the short term, Mansharamani told me in a follow-up interview, the commodities story could hold together longer thanks to new demand out of Japan to rebuild after the quake and tsunami. If a spending binge in Japan increases real demand for metals, it could justify ongoing speculation in metals prices.

But like a balloon batted in the air one last time, this might serve to only make the fall more dramatic, Mansharamani says. "This will temporarily hide the unsustainability of the Chinese investment boom," he wrote to me in an email. "It will embolden mining companies to expand more rapidly. This will likely make the eventual correction more extreme than if the excesses were revealed today."
Read the entire article here.